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Wave of profits are expected this week from carmakers, suppliers

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Wave of profits are expected this week from carmakers, suppliers

Tuesday's report expected to lead way for industry



The resuscitated U.S. auto industry will begin to show the world this week how profitable its restructured companies can be -- even in a slow economy.

Already, the companies are beginning to regain the investment attention of Wall Street.

That's a sharp contrast from a bit more than a year ago, when two of the Detroit Three and nearly every major auto supplier were either in bankruptcy court or perilously close to it.

These days, investors are eager to meet with General Motors as it prepares for a public stock offering. Ford, which is expected to report a third-quarter profit of nearly $1.3 billion Tuesday, has seen its stock climb 35% since the beginning of the year.

Chrysler is to report earnings Nov. 8, but its controlling owner Fiat reported a profit of $236 million Thursday.

Bigger profits also are expected to be reported this week at Auburn Hills-based BorgWarner, Southfield-based Lear and Detroit-based American Axle & Manufacturing.

"These companies are sitting there with less competition, have a little more pricing power, and it's showing up in the stocks," Frank Ingarra, co-portfolio manager for Hennessy Funds, said of the suppliers.

Ford is on track to earn about $6.16 billion for the year -- the biggest profit since 1999, when industry sales were much higher.

"It's a huge achievement for Ford to be able to generate this profit under these low industry volumes," said Eric Selle, credit analyst for JPMorgan.

Ford probably will surprise Wall Street on Tuesday with better-than-expected earnings, in part because of its increased U.S. pickup sales, Barclays analyst Brian Johnson said.

Johnson expects that Ford will earn about 44 cents per share for the three-month period that ended Sept. 30, or 6 cents higher than the average of 15 estimates tracked by Thomson One Analytics.

Ford's F-Series pickup sales have increased by 30.6% through September, compared with last year.

Pickup sales, along with lower incentives and an increase in average transaction prices, will help the company earn about $1.28 billion for the quarter, Johnson said.

What's more, Ford's earnings will kick off a three-month period of financial reports and product launches that will highlight how much the domestic auto industry has changed.

In November, General Motors is expected to report its third profitable quarter in a row, issue a public stock offering to shed a portion of the U.S. government's ownership and launch the Chevrolet Volt electric car after nearly four years of anticipation.

Chrysler, meanwhile, is expected to report improved financial results on Nov. 8 and will introduce its Fiat 500 minicar in late December.

The common theme running across all U.S. automakers and suppliers is that the painful plant closures and production cuts during the last several years finally have put the industry in a position to make money even in a slow economy, said John Hoffecker, managing director of AlixPartners in Southfield.

This year, J.D. Power and Associates expects that total sales of new cars and trucks will be about 11.7 million, or 38% lower than sales in 2007.

"What we've done ... is bump up the profit we can make at a lower sales volume," Hoffecker said.

Each automaker also has started to make the transition away from an over-reliance on big trucks and SUVs.

At Ford, pickup sales remain important because the company makes about $10,000, on average, for each F-150 it sells, Johnson said, and the F-Series remains on track to be America's top-selling model for the 28th year in a row.

But during the last five years, Ford has developed global platforms for its Ford Fiesta subcompact car that went on sale in June in the U.S. and the all-new Ford Focus that will go on sale early next year.

"On the car side, they are just beginning to see the benefits of that strategy," Johnson said.

JPMorgan credit analyst Eric Selle credits Ford President and CEO Alan Mulally for eliminating brands and reducing costs.

"Prior to 2005, Ford was forced to overproduce cars to reach a volume to cover its fixed costs," Selle said in a report this month. "Now ... Ford can pull customers into their vehicles."

Selle said Ford's debt is even less of a concern than it was just a few months ago.

Ford survived the worst recession in decades as the only automaker that didn't file for bankruptcy because of a $23-billion loan it took out in 2006. But that loan left Ford with more debt than GM and Chrysler.

So far this year, Ford has reduced its debt by $7.1 billion, to $27.3 billion, and the company should be able to cut its debt further next year, Selle said.

Rebound extends to suppliers

Suppliers, meanwhile, are benefitting from the Detroit Three's modest production increases this year and are poised to report improved profits during the next several weeks.

Frank Ingarra, co-portfolio manager of Milwaukee-based Hennessy Funds, said five companies from the automotive industry are part of his firm's Focus 30 fund, compared with just one automotive parts retailer last year.

Hennessy selects companies for the Focus 30 fund based on a strict mathematical formula that includes stock price gains, improved earnings and revenue, and invests in them for a full year.

This year, Hennessy's Focus 30 includes local suppliers ArvinMeritor, BorgWarner and TRW Automotive as well as Tenneco and parts retailer Advance Auto Parts.

"Looking back a couple of years ago, when the world came to an end and Chrysler and GM got bailed out, a lot of the smaller auto parts manufacturers got decimated," Ingarra said. "What we are finding out now is that if they survived, they are seeing unit growth coming back."



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